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Small units: banking heavily on credit

Say orders have fallen dramatically and payments for supplies are overdue

It was a chasm too wide to bridge. On the one side sat the bankers, on the other were small businessmen (and women too). They were participating in the special session of the State Level Bankers’ Committee (SLBC) in Karnataka, which gathered to discuss the “extraordinary situation” faced by small and medium enterprises (SME) owing to the economic slowdown.

Market failure

Sitting on the sidelines, one got the impression that while the bankers were receptive to the problems of the small units, there was little that they could do in the face of what was in essence a gigantic failure of the markets. Credit is after all only a lubricant, which facilitates the movement of the cogs in the wheel of the economy. Merely increasing credit — or access to it — is not going to address the problem of a market failure. The lubricant, after all, cannot become the economy’s motive force.

The SMEs sought loan waivers, interest subsidies, deferred repayment of loans and other steps which would provide tangible and quick relief. Bankers, much as they were sympathetic to the plight of the small entrepreneurs, talked a different language.

They talked about easing and increasing the flow of credit and about how banks need to apply less stringent “market-based” criteria in these troubled times. Several representatives of the banks, including the Reserve Bank of India, also articulated the view that banks could not remain healthy if the real economy remained stuck in the mud.

Representatives of SMEs argued that orders had fallen dramatically and that payments for supplies they have made to larger units are either long overdue or are unlikely to ever come.

Stimulus missing

Indeed, T. Ramappa, Secretary-General, Bangalore Chambers of Industry and Commerce, in a brief intervention, made the point that there was no point trying to ease the access to credit for small industries without addressing the larger economy in which they operate. The point is that a stimulus package, which relied primarily on market-based policy instruments such as easing credit flow was bound to fail because the market itself is shuddering to a halt.

Plight of SMEs

What Arvind N. Burji, president, Karnataka Small Scale Industries Association (KASSIA), said highlighted the chasm between the two sides. He said small units, which were facing “extraordinary delays” in payments by larger units, “are neck deep in trouble.”

He also highlighted the spate of suicides by entrepreneurs who business had gone bust in the last few weeks. “Industries will sink, but they will take the banks down along with them if corrective action is not taken immediately,” he warned.

Clearly, all these are way beyond which any banker can promise. And, this explains the chasm between the two sides. It also highlights the absence of a unified package that goes beyond fiscal measures, and is led by a strong intervention by the Union Government acting in coordination with the states.

To be fair to the bankers gathered at the meet, it is not as if they were not sympathetic to the plight of the SMEs. The RBI representative, for instance, suggested that banks lending to large industrial borrowers could set “sub-limits” for meeting payments due to SMEs, so that they are not starved of working capital (to meet daily working expenses such as salaries).

Bankers, however, are in a bind because the policy thrust remains mired in a mindset that gives primacy to markets. Goading banks to open their purse strings is clearly not going in this situation.